Answers

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ACCA Certied Accounting Technician Examination Paper T8 (INT)
Implementing Audit Procedures (International Stream) June 2010 Answers
Section A
Questions 110 Multiple Choice
Part Answer See Note Below
1 B 1
2 C 2
3 D 3
4 D 4
5 B 5
6 B 6
7 A 7
8 C 8
9 D 9
10 D 10
NOTES
(1) The auditor does not have the right to attend and speak at directors meetings and should not make or take part in any executive
decisions on behalf of the company. The correct answer is therefore option B.
(2) Evaluating and listing the internal controls of a company does enable an auditor to report to management on the strengths and
weaknesses of those controls (option A). However, the principal purpose of the measures is to provide the auditor with the opportunity
to reduce substantive procedures (option C).
(3) Control risk and inherent risk are components of nancial statement risk, which is governed by the circumstances of the audit client
and therefore is outside the control of the auditor. Sampling risk is a component of detection risk, which is controlled by the auditor.
The correct answer is therefore option D.
(4) The correct answer is option D. The overall audit strategy documentation should identify the areas of the nancial statements
deemed to be of high risk and outline the strategy for the audit of those areas. Systems narrative notes and system owcharts serve a
similar purpose in that they provide an overview of systems for review and evaluation purposes, whilst audit attention points brought
forward simply highlight areas and points to be reviewed as a consequence of relevant ndings in the previous years audit.
(5) With the exception of the area identied in (2) communications with the staff of the audit client, the standardisation of the working
papers should facilitate in all of the areas identied. The extent and quality of the communication with the staff of the audit client, will
depend on the personal attributes of audit staff and their individual ability to communicate effectively. The correct answer therefore
is option B.
(6) Small companies normally have particular difculty in implementing adequate segregation of duties (option B), simply due to a
shortage of employee numbers. Whilst there may also be some difculty in implementing the other types of control mentioned, such
difculties are not normally insurmountable.
(7) Whilst a circularisation of trade receivable balances is intended to provide assurance with regard to several audit objectives, the
principal objective is to provide assurance with regard to existence. As the results from a positive circularisation are generally
recognised to be more reliable than those from a negative circularisation, the correct answer is option A. The verication of subsequent
payments is primarily a test for valuation and testing for balances by agreeing to sales documentation does not take account of
payments that may have been received.
(8) The correct answer is option C. The gross prot margin is an income statement ratio and therefore does not give any indication of
the working capital position of a company. In isolation both the trade receivables collection period and the trade payables payment
period can provide an indication of a companys working capital position albeit a weak indication.
(9) The correct answer is option D. The descriptors given at (1) and (2) should not be included.
(10) An emphasis of matter paragraph should be included after the Opinion paragraph, must not be used to report matters other than
those affecting information presented or disclosed in the nancial statements and should indicate that the auditors opinion is not
modied in respect of the matter emphasised. The correct answer is option D the inclusion of the paragraph should not affect the
auditors opinion on the nancial statements subject to audit.
(2 marks per each correct answer)
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Section B
1 Poppy Co
(a) The control environment will comprise the following additional elements:
(i) Commitment to competence matters such as managements consideration of the competence levels for particular jobs
and how those levels translate into requisite skills and knowledge.
(ii) Participation by the directors attributes of the directors including the extent of their involvement in the day-to-day
operation of the business and the information they receive and scrutiny of activities.
(iii) The directors philosophy and operating style characteristics such as their approach to taking and managing risks and
their attitudes and actions toward nancial reporting.
(iv) The companys organisational structure being the framework within which the companys activities for achieving its
objectives are planned, executed, controlled and reviewed.
(v) The assignment of authority and responsibility being matters such as how authority and responsibility for operating
activities are assigned.
(vi) Human resource policies and practice policies and practices that relate to, for example recruitment, orientation, training,
promotion, compensation and remedial actions.
(Full marks will be awarded for identifying and explaining any FOUR of the above elements)
(b) ISA 240, The Auditors Responsibilities Relating to Fraud in an Audit of Financial Statements provides guidance on the matters
in question and denes fraud as:
An intentional act by one or more individuals among management, those charged with governance, employees or third parties,
involving the use of deception to obtain an unjust or illegal advantage
The ISA also states The distinguishing factor between fraud and error is whether the underlying action that results in the
misstatement of the nancial statements is intentional or unintentional
(Full marks will be awarded for a denition and comments similar to the above.)
(c) Control activities that should exist to facilitate control over the engagement of factory employees through to the production of
Poppy Cos weekly payroll for factory employees include the following policies and procedures:
Activity: Objective:
Appropriate selection and recruitment procedures To ensure that employees have the adequate level of skills
including interview of candidate(s) attended by the and attributes to carry out their duties effectively and
factory manager and a member of the human efciently.
resources department.
Written notication to the wages department, To ensure that only authorised employees are paid wages
authorised by the factory manager and a responsible by the company at authorised rates of pay.
ofcial from the human resources department,
comprising new employee personal details, rate of
pay and job title.
Updating of the wages master le by a suitably To ensure that only authorised employees are paid wages by
authorised responsible ofcial of Poppy Co, separated the company at authorised rates of pay.
from the wages processing function.
Robust recording of time worked by individual factory To ensure that individual employees are paid only for hours
employees on a daily and weekly basis. actually worked in accordance with their conditions of
employment.
Authorisation of employee time records on a daily To ensure that individual employees are paid only for hours
basis by production supervisor(s). actually worked in accordance with their conditions of
employment.
Authorisation of employee weekly time records by To ensure that individual employees are paid only for hours
the factory manager, prior to processing. actually worked in accordance with their conditions of
employment.
Forwarding of the weekly time records to a responsible To ensure that individual employees are paid only for hours
ofcial in the wages department for initial review, actually worked in accordance with their conditions of
reasonableness, check and enquiry as appropriate employment.
prior to wages processing.
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Activity: Objective:
Weekly written notication from the factory manager To ensure that only authorised deductions are made from
to a responsible ofcial in the wages department of employees weekly wages payments.
authorised deductions from pay, for initial review,
reasonableness, check and enquiry as appropriate
prior to wages processing.
Segregation of duties between processing of wages To ensure that only authorised employees are paid wages by
data through wages payroll, updating of wages master the company at authorised rates of pay.
le and review procedures.
Prior to payment run review of processed payroll by a To ensure that only authorised employees are paid wages by
suitably authorised responsible ofcial of Poppy Co, the company at authorised rates of pay.
separate from the wages processing function.
(Full marks will be awarded for identifying any FIVE of the above or relevant control activities and for identifying the control
objective of each.)
(d) The following exception reports could typically be used by Poppy Cos management:
Employee starters report.
Employee leavers report.
Employee paid overtime report.
Employee specied range, gross payments report.
Employee specied range, net payments report.
Employee specied range, deduction of payments report.
Employee holiday pay, payments report.
Employee sickness pay, payments report.
(Full marks will be given for identifying any FOUR of the above or other relevant reports.)
2 Daisy Co
(a) ISA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment
sets out the relevant matters that an auditor should consider in this regard. Applying the requirements to this specic engagement,
the matters that my rm may have considered when obtaining an understanding of the business operations of Daisy Co may
include:
(1) Nature of revenue sources, services and products. The company has several income streams as detailed and my rm
should have gained an understanding of the extent to which the company relies on these as its principal source of
revenue, the sensitivity of each to market conditions, and the complexities involved in measuring and recording income
from each stream.
(2) Control of activity and reporting mechanisms, Daisy Co owns six golf clubs and there are various strategies the company
could adopt to control the day-to-day operations at each club and reporting. For example, autonomous operations and
reporting at each club or divisionalisation of operations and reporting.
(3) The geographical spread of activities and administrative functions. Club locations are spread throughout the country and
in order to have a full appreciation of audit implications arising, my rm need to know the location of each club, any
centralised administration activity and locations of inventory.
(4) Alliances, joint ventures and outsourcing activities. If the company is party to any of these arrangements, for example,
marketing alliances with other agencies or out-sourcing of the companys payroll function, then there could be signicant
implications if my rm is to ensure an effective and efcient audit.
(5) Employment arrangements including the existence of union constraints, pension and other post employment benets,
stock option or bonus arrangements and government regulation related to employment matters. Given the nature and
geographical spread of the companys activities, it is likely to have a signicant number of employees with varying
contracts of employment and conditions of service. As such these will have material nancial implications for Daisy Co
and my rm should therefore be familiar with them.
(6) Details of important suppliers to the company. It is very likely that Daisy Co will trade with many providers of goods and
services some of which may be key providers to the company. As auditors, my rm should be aware of the identity of
the key providers in order that it may address any implications arising from issues arising with them.
(Note: full marks will be awarded for identifying and explaining any FOUR of the above or other relevant matters with regard
to Daisy Cos business operations.)
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(b) (i) It is a requirement of ACCAs Code of Ethics and Conduct that member rms, who are asked to replace previous auditors,
should determine whether there are any professional or other reasons, for not accepting the engagement. Whilst it would
therefore have been a professional requirement and also a professional courtesy to communicate with the existing auditor,
the communication process could have revealed professional reasons, other reasons (or both) for my rm not to accept
the audit appointment.
(ii) It is a requirement of ACCAs Code of Conduct and Ethics that member rms issue a record in writing and send their
client a letter of engagement that sets out the terms of the engagement. Similarly ISA 210 Agreeing the Terms of Audit
Engagements states that, the auditor shall agree on the terms of the engagement with management or those charged
with corporate governance, as appropriate.
In any professional service relationship between the service provider and client, it is important that both parties should be
clear as to their respective responsibilities. The main purpose of issuing an engagement letter to Daisy Co was therefore
to clearly set out the responsibility of my rm and the directors of Daisy Co under the agreement to provide audit services
whilst also summarising other matters including the scope of the audit, the form of any reports and the basis for charging
fees by my rm.
(c) The fact that Jed Thorn is recognised to be a very entrepreneurial and assertive individual, increases the inherent risk associated
with the audit of the nancial statements of Daisy Co. This is because Jed holds a very inuential position in the company and
his personal attributes as described may have a detrimental effect on the companys control environment leading to material
misstatement in the nancial statements. In addition to this my rm may be concerned in that the decision to change auditors
came very soon after Jeds appointment. Jeds extremely ambitious plans to expand the company operations whilst relying on
the bank so to do, could have precipitated the decision to dismiss the previous auditors on the basis they were not prepared to
succumb to unreasonable requests and pressure from Jed. For example, a change to an unacceptable depreciation policy, to
increase reported prots and so attract increased support from Daisy Cos bank.
(d) (i) Daisy Co has nine income streams at each club and each club is a remote operating unit. It would therefore be a particular
challenge for the company to design and implement appropriate internal controls to meet sales systems objectives
including that of ensuring the completeness of recording of income. The majority of the companys income emanates
from the provision of services. By the nature of the services provided most controls are designed to record the provision of
a service and therefore the fact that revenue should be received could be circumvented, unless very robust and stringent
documentary, internal check and supervisory controls were introduced.
As is common in many service provider companies, for Daisy Co, it is likely that such tight controls would be considered
to be impractical and unreasonably detrimental to the efcient day-to-day workings at each club and would therefore not
be implemented. In their absence there would be a lack of a complete audit trail from the point of service to the receipt
of income. Therefore, my rm may plan to rely on analytical procedures to gain assurances as to individual club income
streams and the completeness of the income gure reported in Daisy Co.
(ii) Relationships that could be used as the basis for comparing for audit purposes, the various income streams for the
forthcoming 2010 nancial year end to hose of the previous year include:
Income Per Member Day Green Fees Income Compared To
From: Income From:
Membership Fees Golf Buggy Hire
Green Fees Golf Club Hire
Tournament Fees Refreshment Bar Sales
Golf Club Hire Caf Bar Sales
Golf Buggy Hire Driving Range Hire
Driving Range Hire Golf Club Sales
Golf Shop Sales Membership Fees
Refreshment Bar Sales
Caf Bar Sales
(Full marks will be awarded for identifying any SIX of the above or other relevant relationships.)
3 Buttercup Co
(a) My rm should consider the following:
Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably
be expected to inuence the economic decisions of users taken on the basis of the nancial statements;
Judgements about materiality are made in light of surrounding circumstances and are affected by the size or nature of a
misstatement, or a combination of both; and
Judgements about matters that are material to users of nancial statements are based on a consideration of common
nancial information needs of users as a group. The possible effect of misstatements on specic individual users, whose
needs may vary widely, is not considered.
(Note: Full marks will be awarded to answers containing points similar to those above.)
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(b) Any error detected when carrying out tests of control indicates a weakness in the accounting systems. Therefore all such errors
are normally deemed to be material.
However, some controls are more important than others so a higher level of errors may be acceptable where controls are
deemed to be less important or where other controls detect errors emanating from weak controls.
It is generally accepted, from an audit perspective, that errors found in tests of control relating to the processing of small items
which do not have a material effect on the nancial statements are less important than errors on large items. However, auditors
need to be cautious in applying this principle in areas particularly susceptible to fraud, as to ignore errors in these areas,
could have obvious subsequent ramications for the audit rm. Similarly, extra caution needs to be exercised when assessing
the potential effect of errors detected during the tests of control in areas where there is less likelihood of correction by other
controls or events. For example, errors leading to excessive trade discounts being granted to sales customers are less likely to
be corrected than errors resulting in underpayments to suppliers.
(Note: Full marks will be awarded to answers containing points similar to those above.)
(c) My rm should carry out the following procedures to obtain assurance that trade payables and accruals are not understated in
Buttercup Cos nancial statements:
(1) Agree the total as reported in the nancial statements to the underlying accounts in the companys general ledger.
(2) Reconcile a representative sample of the trade payables supplier balances to supplier statements. As the test is for
understatement, higher balances should be checked from statements to the ledger and lower balances from the ledger to
statements.
(3) For balances where the supplier statement is not available, a payables circularisation could be carried out to conrm
balances at the year-end date.
(4) Check cut-off by reference to the last goods received note and ensure that all deliveries have been completely accounted
for in the companys purchases account either by way of subsequent supplier review or by accrual.
(5) Review material payments to suppliers after the year end date and check to ensure that any relating to liabilities incurred
prior to the year-end date were provided for in the companys nancial statements.
(6) Review the list of accruals for reasonableness in line with activities undertaken and costs incurred during the accounting
period and also compare to accruals made at the end of the previous accounting period.
(7) Communicate with the companys management and consider liaising with the companys legal representatives to gain
assurance that all material accruals arising from the normal operations of the company or from possible outstanding
litigation against it have been provided for.
(Note: Full marks will be awarded for describing any FOUR of the above or other relevant procedures.)
4 Lily Co
(a) Internal auditing is an independent objective assurance and consulting activity designed to add value and improve an
organisations operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of risk management, control and governance processes.
(Full marks will be awarded for answers containing points similar to those above.)
(b) ISA 230 Audit Documentation provides guidance on this matter, and in line with this the internal audit manager should have
a reasonable understanding of the following matters:
Audit processes the reason for having the companys nancial statements audited by independent external auditors. The
manager should also understand the working processes of the external auditors and their expectation of the internal audit
function of Lily Co if they are to rely on its work to reduce the extent of their own audit procedures.
International standards on auditing (ISAs) and the legal and regulatory requirements applicable to Lily Co the external
auditors must adhere to ISAs and be fully conversant with the legal and regulatory environment in which Lily Co operates. If the
manager ensures that (s)he and members of the internal audit team carry out relevant aspects of their work with an approach
and understanding similar to that adopted by the external auditor (for example, when selecting samples for testing), then there
is an increased likelihood that it will be relied upon by the external auditors. Similarly, when relevant internal work is carried
out against a background of knowledge of the legal and regulatory requirements affecting Lily Co, the credibility of the work is
increased.
The business environment in which Lily Co operates in order to assess the risk of material misstatements in the nancial
statements of Lily Co, it is imperative to have a full understanding of the business environment in which the company
operates. In addition to outside factors this also includes the companys control environment. Whilst it is the responsibility of
the companys external auditors to carry out their own risk assessment procedures, they may choose to rely on the work of the
internal audit function to some extent, to help highlight risk areas and thus facilitate an effective audit.
Obviously the extent of reliance will be dependent on the external auditors assessment of the level of understanding of the
internal auditors.
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Auditing and nancial reporting issues relevant to Lily Co and the sector in which it operates Lily Co imports goods from abroad
for wholesale distribution. As such certain nancial reporting standards may have particular relevance when preparing the
companys nancial statements. For example, when accounting for foreign currency transactions, inventory or for depreciation
on the land and buildings it owns. Similarly given the spread of the companys operations and the fact that it trades abroad,
various issues will require particular audit attention. For example, the audit of inventory stored at distribution depots and the
transmission of accounting information from remote locations. Work carried out by the internal audit function in these areas
may be relied upon by the external auditors but only if the internal auditors have a full understanding of the issues arising and
that they have been addressed fully in their work.
(Full marks will be given for identifying any THREE of the above matters and for a pertinent explanation of each matter
identied.)
(c) By its very nature, if an internal audit function is not independent then it will not be objective and effective. Objectivity in this
context applies not just to the state of mind of individual internal auditors but also to lines of authority as to the direction of
work to be undertaken, reporting of ndings and the making of recommendations by the audit team.
As noted in (a), above internal auditing is an activity designed to add value and improve an organisations activities. To meet
these objectives, internal auditors need to be secure in the knowledge that they can carry out their work independently, free of
any outside attempt to inuence or to restrict the scope of their work. Clearly, if an internal audit function is subject to such
inuence and restriction (i.e. it is not independent), then it may be directed away from areas of the business which require
enquiry or investigation or as importantly, valid reporting points and recommendations for improvement may be ignored. For
example, where the individual with ultimate responsibility for internal audit is aware of operational inefciencies in other areas
where they have functional responsibility; they may steer internal audit assignments away to efcient areas of the business to
avoid highlighting possible failings on their own part. Alternatively, the scope of work could be restricted so rendering any work
actually performed as of only limited use in terms of meeting specied objectives a point not lost on external auditors.
In the majority of companies the work of the internal audit department is broad ranging, involving assignments across a large
proportion of a companys operations. However, many assignments are linked to nancial and accounting systems, and where
an internal audit function exists, there is an expectation that it should routinely carry out tests of control and related substantive
procedures on the accounting systems. These should be carried out as an integral part of the companys own internal control
and also as a means of assisting the external auditors with regard to the external audit. Given this requirement and the points
explained in the previous paragraph, Lily Cos nance director should not have responsibility for the effective and efcient
operation of the companys internal audit department.
(Full marks will be awarded for answers containing points similar to those above.)
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ACCA Certied Accounting Technician Examination Paper T8 (INT)
Implementing Audit Procedures (International Stream) June 2010 Marking Scheme
In Section A questions 1 to 10, each multi-choice question carries 2 marks.
Full marks are awarded for choosing the correct option. No marks will be awarded where an incorrect option is selected or where more
than one option is selected.
In Section B for all questions the marking scheme generally indicates that up to 1
1
/
2
marks may be awarded for relevant points.
Consideration should be given to the depth and relevance given by each candidate when answering the question; for example if only
a brief explanation is given then it may only be worth
1
/
2
mark whilst a detailed discussion could be worth up to a maximum of
1
1
/
2
marks.
Marks are not allocated to specic points as the candidate may include a valid point within their answer that is not included in the model
answer; the candidate should be given full credit for such points.
The majority of the questions require several points to be included within the answer, so if a candidate concentrates on a few points then
they should not be given as much recognition, and their overall mark should be lower than a candidate who provides a range of points.
In conclusion, it is important that the overall standard of the candidates answers is considered in terms of whether it is above or below a
pass grade. After marking each question, the total mark awarded should be evaluated to assess whether it is fair. If it is decided that the
total mark is not a proper reection of the standard of the candidates answer then the answer should be reviewed again, and the marks
adjusted to ensure that the total awarded is fair. If the answer is of a pass standard then it should be awarded a minimum of 50%; if it
is below a pass standard then it should be awarded less than 50%.
Section A
Questions 110 Multi-Choice
2 marks for each correct answer with an overall maximum of (2 x 10) (Total 20 marks)
Section B
1 Poppy Co
(a) Identifying and explaining FOUR elements of the control environment of a limited liability company.
1 mark per element identied up to a maximum of (4 marks)
Explanation of each element identied above.
Generally 1 mark per point up to a maximum of (4 marks)
(b) Dening a fraudulent act and stating the key distinguishing factor between fraud and error where an underlying action results
in a misstatement of the nancial statements of a company.
Dening fraud
Generally 1 mark per point up to a maximum of (2 marks)
1 mark for identifying the factor of intention (1 mark)
(c) (i) Identifying FIVE control activities that should exist to facilitate control over the engagement of factory employees through
to the production of Poppy Cos weekly payroll for factory employees.
1 mark per activity identied up to a maximum of (5 marks)
(ii) Stating the control objective of each activity above.
1 mark per control objective up to a maximum of (5 marks)
(d) Identifying FOUR different computer produced exception reports to facilitate control over the weekly payroll of factory
employees
1 mark per exception stated up to a maximum of (4 marks)
(Total 25 marks)
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2 Daisy Co
(a) Identifying each matter for consideration when obtaining an understanding of the business operations.
1 mark per matter up to a maximum of (4 marks)
Explanation of each matter identied above.
Generally up to 1 mark for each point up to a maximum of (4 marks)
(b) (i) Explaining why my rm communicated with Daisy Cos previous auditors.
Generally
1
/
2
mark per point up to a maximum of (2 marks)
(ii) Explaining why my rm issued an engagement letter to Daisy Co.
Generally
1
/
2
mark per point up to a maximum of (3 marks)
(c) Explaining concerns my rm may have had with regard to Jeff Thorns appointment and also the timing of the decision to
change the companys auditors.
Generally
1
/
2
mark per point up to a maximum of (3 marks)
(d) (i) Explaining why my rm may plan to rely on analytical procedures to provide assurance as to the completeness of the
reported income gure.
Generally
1
/
2
mark per point up to a maximum of (3 marks)
(ii) Identifying SIX ratios that could be used as a basis for comparing the income streams of each club.
1 mark per ratio up to a maximum of (6 marks)
(Total 25 marks)
3 Buttercup Co
(a) Stating the matters to be considered by the rm in determining whether an error or omission, detected at the substantive
procedures stage, is material.
Generally
1
/
2
mark per point with a maximum of 2 marks for general denition of the term, 1 mark for judgements about
materiality and 2 marks for judgements about matters that are material to users of the nancial statements.
Up to a maximum of (5 marks)
(b) Explaining the matters to be considered by the rm in determining whether an error, detected at the tests of controls stage, is
material.
Generally up to 1 mark for each point up to a maximum of (4 marks)
(c) Describing FOUR procedures that my rm should carry out to obtain assurance that trade payables are not understated in
Buttercup Cos nancial statements.
Generally up to 1
1
/
2
marks per procedure up to a maximum of (6 marks)
(Total 15 marks)
4 Lily Co
(a) Dening the term internal auditing.
Generally
1
/
2
mark per point up to a maximum of (2 marks)
(b) Identifying and explaining three matters about which the internal audit manager should have a reasonable understanding if she
is to meet the recognised criteria of being an experienced auditor.
1 mark for identifying each matter up to a maximum of (3 marks)
1 mark for explaining each matter up to a maximum of (3 marks)
(c) Explaining the importance of an independent internal audit function and why Lily Cos nancial director should not be
responsible for the effective and efcient operation of the companys internal audit department.
Generally up to 1 mark per point to a maximum of (7 marks)
(Total 15 marks)